Operating a Small Business

Operating a Small Business

Assignment 2:

BUS 463: Entrepreneurship Feasibility and Analysis

Operating a Small Business

When beginning a new venture, there are different business and legal structures in which an owner(s) must choose to define that business. For tax purposes, the entrepreneur must establish the business as either; a sole proprietorship, partnership, cooperation or limited liability company (LLC). A sole proprietorship is the easiest of the organization’s types to form. It offers the owner complete managerial control. However, they are personally liable for all the financial obligations of the business. Partnerships are ventures where two or more individuals agree to share the business’s profits or losses. The main advantage of this form of organization is, the partners do not bear the tax burden of profits or the benefit of losses-profits. Losses are reported by each partner separately on their individual income tax returns. A primary disadvantage is liability. Each partner is personally liable for the financial obligations of the business. A corporation is a legal entity created to conduct business. The corporation becomes a separate entity from those who founded the organization. Like the others mentioned above, corporations can be taxed and held legally liable for its actions. The major benefit of corporate status is the avoidance of personal liability, while some significant disadvantage is, it’s costly to form and the extensive record-keeping it requires. For tax purposes, double taxation is sometimes a drawback to incorporation. S corporations or Subchapter, is a popular variation of the regular C corporation and avoids double taxation by allowing income or losses filed on individual tax returns, like that of a partnership. Lastly, the LLC, described as A “hybrid form of partnership,” (entrepreneur.com, 2017), allows owners the advantages of both a corporation and partnership forms of organization. The benefits of LLC’s are that profits, and losses can be passed through to owners without taxation of the business itself and affords owners protection from personal liability.

The business I proposed is a 24-hour Daycare, an idea that my wife and I have discussed on frequent occasions. Our daycare will not exist in our home but involve an actual brick and mortar location, that’s open around the clock including weekends. For this establishment, I would go with the LLC. There are various reasons for me choosing this legal structure, as it is the most suitable for a daycare business. This legal form of organization for my business is one of the most attractive for investors due to its members not being personally liable for the debts of the company. If there is a court judgment incurred by against an LLC, creditors can’t seek the personal assets of the LLCs members, just the assets of the business. My personal finances and that of my investors cannot be touched if the company gets in trouble. Creditor won’t be able to collect from my backer’s other ventures if any as well. Profits and losses can also pass through its owners without taxation of the business itself (entrepreneur.com, 2018). Some of the issues I find with me incorporating are; the impact on how much I will pay in taxes, the type and amount of paperwork required to start the business, the personal liability I face and your ability to raise money.

Organizational structure provides the framework for the business performance. In determining the organizational structure needed to get the business up and running, along with the number of employees, job titles, and job descriptions necessary to get through the first year of operation, the entrepreneur must do a lot of research. As a 24 hour a day operation, we must adapt our center’s module to meet the specific needs and goals of the customer. When it comes to Childcare laws and regulations, there is little room for modifications. Incorporation of a business requires the filing of many organizing documents. The articles of incorporation are one such document. The articles of incorporation, or bylaws in some cases, will outline the mission, purpose, and policies of the company. As the owner, my job would intel the development, signing of these documents. One of my first hires would be a director to assist in the enforcing of the center’s policies. The director would be responsible for providing oversight of all functions of the center, to include financial, regulatory, hiring, facility issues and supervision of the daycare staff. Licensing and regulations play a considerable part in the organizational structure of a daycare center. My business must follow state regulations that govern operations, staffing, and safety. For instance, Childcare laws in Georgia, require a different lead teacher assigned to each group of children in a daycare center, and a developed plan of scheduled age-appropriate activities for children must be followed (Sessoms, 2018). Staffing at start-up based on the needs of the children attending and additional services provided by my center, i.e., 24 hours a day, seven days a week operation, will consist of day-to-day management by a director and assistant director and a Childcare staff of 18 to 20. The team will be a mixture of early childcare educators, teacher aides, and childcare providers. Other employees needed will include three front desk personnel, a four-person janitorial team, four food service workers, one transportation staff member. Night time security will be contracted out. An organizational chart will be used to help the centers track teacher assignments and adhere to staffing requirements.

Encourage harmony among the employees and building an effective brand is key to our first year of operations. Encouraging the employees that their jobs are meaningful can improve job performance, benefit, and staff confidence. Management that invests in employee training and team building prepares the staff to achieve better client benefit, better work security practices, and profitability upgrades. Team building is a frequently ignored, yet fundamental movement for your business. Management can utilize group working to commend victories or to form your representatives into a group. The organization will benefit through expanded collaboration among your workers and a sentiment achievement for everybody. Task will seem to be distinctly less demanding when all representatives comprehend that they are cooperating for a shared objective. Conflict in the work center will in-turn decline as workers understand the significance of everybody’s assignments and duties. Rather than provide employee training programs, companies could elect to incorporate team building exercises when a new worker comes on board. The practice should happen between the newcomers and veterans in the organization. Exercise should persuade an association between the two to foster enhanced communication. Communication is critical to the achievement of a business and is an essential part of teambuilding.

Ways to satisfy all stakeholders in a business that includes investors, employees, customers, and the community as involved can be tricky. Companies have conflicting responsibilities to multiple stakeholders. They need to satisfy shareholders, employees, customers, and the community. Paying bonuses to managers may create conflict as it may only reflect bottom-line profit. Propose alternative compensation schemes and support your proposition. The friction created when management rewards reflecting bottom-line profits only include, reduced morale- If the bonus is solely based echoing the bottom line, rewards may be lower than expected due to the profit margin. Uneven Cash Flow through the paying of incentives that do not have any specific monetary limits or pay dates can inflict damage on your cash flow. Fraud could also come into play as employees may commit fraud to earn incentives. Alternative Pay for Performance could include, company stock options are significant incentives and give ownership rights to workers in the form of stock options. A small business may not offer this option if the business is not publicly traded. Ownership rights are a lot like stock options, with the difference being the requirement to exercise an option of an exercise price. An example is when a small business may grant an employee the right to own 5% of the company (simplicitylaw.com. 2010).

The suggested way to fund the business will be a combination of personal assists, loans, and Investors. A business loan from The Small Business Administration (SBA) is one such option. The SBA loaned out more than $19 billion to small business in 2014 alone, and many of their past restrictions are no longer in effect thus, making more loans money available (Sutter, 2015). Some investor options include Private equity (PE), Venture capital (VC), and Angel. PC are investment usually made by private individuals or privately-owned institutions. VC’s are typically designed to fund startup companies with the potential for high growth. A good thing about VCs is that they also provide startups business-planning expertise and assistance. Angel investors are individuals with high net-worth seeking high returns through private investments. An Angel investor is the least likely option for me. My expenses are all things involved in preparing to open the daycare, to include our market research, mileage costs involved in researching a location, advertising, training, fees for professional consultations and lawyer or accountant fees. I need funding for Capital Expenditures, which are one-time purchase items such as equipment, inventory, property, and vehicles. Having additional savings available and credit cards may be necessary. I will need additional funds to support the business in its start-up phase and pay expenses such as payroll, rent, utilities, etc. until the company is self-sustaining. Allocating costs involves the creating of a list of the start-up expenses and capital expenditures that you project to incur, along with your assets. Per the Kauffman Foundation, the average startup uses about $30,000 in capital (sba.gov, 2011). For my business, I estimate $45,000 in funding needed. The funding will come from $10,000 personal funds and 35,000 in the form of a business loan and or from investors. $35,000 will primarily be used to secure the center’s lease, renovate the facility, to purchase and or lease furniture and equipment, including safety and security products and ensure a couple of months of payroll. Equity investors are attracted to businesses that can show the likelihood of significant financial returns. In general, they would like to see profit margins greater than 50 percent (MBDA.gov, 2017). Entrepreneurs can attract equity investors by preparing a current investor-focused business plan based on market or business model changes (MBDA.gov 2017). An option for entrepreneurs looking for Equity investor funding is to consider the government venture capital programs available through the Small Business Investment Company program.

In analyzing how much of the funding should come from debt, and how much from equity, I must look at the pros and cons. Debt consist of borrowing money to be repaid back, plus interest. Equity involves raising the capital needed by selling stakes in the company. I will have to decide whether I rather pay back a loan or offer shareholders stake in my company. Advantages of Debt are, the creditor does not have a claim to my businesses, so the debt does not weaken my interest as the owner of the company. Creditors have no direct claim on future profits of the business and are only entitled to repayment of the agreed-upon loan principal and interest. If the business is successful, then I as owners procure a more considerable portion of the profits than I would if an equity investor was sold stock to finance the growth. The exception is in the case of variable rate loans as interest and principal are forecasted amounts that I can in cooperate. I can deduct Interest on the debt on my company’s tax return, lowering the actual cost of the loan repayment. Since the business is not required to comply with state and federal securities laws and regulations, raising debt capital is the far less complicated chose of the two. With an Equity investor, for the shareholders, I am required hold periodic meetings, send mailings periodically, and seek the vote of shareholders before taking specific actions involving the business. Disadvantages of Debt Compared to Equity are, the loan must be repaid at some point. Interest is a fixed cost which raises the company’s break-even point. Cash flow is needed for me to repay both principal and interest payments, and loans are usually not repayable in varying amounts over time based on the cycles of the business. Companies with large amounts of debt as compared to equity often find it challenging to grow because of the high cost of servicing debt. Debt also often put restrictions on the company’s activities. Thus, preventing the pursuit of alternative financing options and non-core business opportunities. The more significant a business debt-equity ratio is, the riskier a company is seen through the eyes of lenders and investors. Businesses are limited to the amount of debt it can carry. As collateral, a company is usually required to pledge its assets to the lender, and owners of the company are expected to guarantee repayment of the loan personally in some cases. For these reasons, as far as growth, I analyze that for me, 100 present of our funding should come from debt, with zero coming from equity.

References

Of all the choices. (2017). Choose Your Business Structure. Retrieved February 24, 2018 from https://www.entrepreneur.com/article/38822

Sessoms, G. (2017). The Organizational Structure of a Daycare. Retrieved February 24, 2018 from http://smallbusiness.chron.com/organizational-structure-daycare-10431.html

Sutter, B. (July 1, 2015). 3 Ways to Find the Right Investor for Your Business. Retrieved February 24, 2018 from https://www.entrepreneur.com/article/246997

Texas state requirements. (2017). Retrieved February 25, 2018 from https://www.daycare.com/texas/

Equity capital generally is. (Aug 2, 2010). Attracting Equity Investors. Retrieved February 25, 2018 from https://www.mbda.gov/news/blog/2010/08/attracting-equity-investors